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For most people, a mortgage will be the largest long-term debt obligation they’ll take on in their lifetime. Getting access to the best possible mortgage rate can minimize the overall costs you’ll encounter as part of the home buying experience. What may seem like a small percentile of difference can equate to tens of thousands of dollars owed in interest over the lifetime of a mortgage.
Factors That Influence Your Mortgage Rate
There are many factors that will influence the rates you get access to. Some of these factors are dependent on who you are as a borrower, and some are more dependent on the type of mortgage terms you choose.
In Canada, home buyers are required to put down at least 5% of the home purchase price as a down payment. If you put down less than 20%, you’re required to purchase mortgage default insurance. Since the insurance lowers the risk for the lender, this can get you access to lower rates than if you made a larger down payment upfront. If you plan to make at least a 20% down payment on your new home, not only will you be able to skip the cost of mortgage default insurance, you’ll save more money in the long run by chipping away at your interest faster and lowering your monthly payment amount. There are pros and cons for each option, but if saving up 20% of your dream home’s purchase price just isn’t possible, know that it’s not required to access better rates.
How well you know and understand your credit score plays a big part in how you navigate the mortgage and home buying experience. Generally speaking, the higher your credit score is, the better your mortgage terms and rates will be. As a result, it’s important that you check your credit score in advance and ensure you do everything you can to improve it prior to applying for a mortgage, so you can ensure you’re getting access to the best possible rates.
These days, more Canadians are opting for longer amortization periods to cut monthly payments by as much as 10%. You’ll just need to consider that the longer the amortization period, the more you’ll pay in interest as a result. Consider all your amortization options to determine which one will get you a manageable monthly payment without saddling you with too much interest to pay off in the long term.
Type Of Mortgage
One of the first choices you’ll face when you apply for a mortgage is a variable or fixed rate. With a variable rate mortgage, the rate changes with the Prime rate +/- a specific amount. Though the rate here may fluctuate, the relationship to the Prime rate stays the same for the course of your term. A fixed-rate mortgage means the payment you make each month and the mortgage rate itself stays the same for the term of your mortgage. While variable rates tend to be slightly lower than fixed rates at any given time due to the fact that they are inherently less risky for lenders, that isn’t always a guarantee so it’s important to do your homework before making the choice that’s best for you.
When lenders choose to give you money, they’re taking a risk that you may not make your payments on time. For this reason, your level of repayment, interest and prepayment risk is assessed to determine if a higher interest rate is necessary to make up for your overall level of risk to the lender.
Repayment / Credit Risk
The biggest concern for the lender is that you won’t be able to repay your loan. If you have a high credit score, this shows lenders that you’re a trustworthy borrower and as a result, you’ll get access to better rates. If you’re putting down less than 20% for your down payment, you’re legally required to get mortgage default insurance in Canada. Since this additional insurance protects the lender from the risk of default, you may get access to a better interest rate than if you opt for an uninsured mortgage and a larger down payment.
Interest Rate Risk
When your mortgage term concludes, you’ll have the opportunity to renegotiate for different rates and conditions. While mortgage terms tend to vary from 6 months – 10 years, the average Canadian chooses a 5-year duration. You can choose a fixed rate, which will keep your interest rate the same for the full course of your term, or you can choose variable, which means it will fluctuate depending on the market.
Despite what you may think, repaying your mortgage loan early isn’t a bonus in the lender’s eyes. This puts the lender at risk of losing money because they won’t be able to profit as much, even more so if the interest rates have dropped since your mortgage was opened. If you want the flexibility to pay your mortgage off in full early, you can choose an “open” mortgage which will often come with a higher interest rate than a “closed” mortgage which limits how much you can prepay. Of note, there are lenders that do offer prepayment privileges which allows you to increase your regular scheduled payment by a certain percentage and or make an annual lump sum payment to a maximum percentage without penalty. These privileges typically allow for 10% – 20% of the payment and overall mortgage balance.
What To Consider When Choosing A Lender
There isn’t one best overall factor across the board when it comes to choosing a lender. It’s wise to do your research as a borrower and ensure you understand the pros and cons of each mortgage product you’re considering before making any final decisions. Consider looking at the following with a critical eye as you weigh your options:
There are lots of additional costs that can significantly increase the price of your mortgage, and if you’re too busy being distracted by low overall interest rates, you could miss them. Whether it’s underwriting, application fees, appraisals, broker fess or settlement costs, you’ll want to be aware of what other costs you should consider when comparing lenders.
As lenders are legally required to provide detailed estimates, borrowers are also legally entitled to negotiate for better terms, especially if they have a high credit score or intend to make a significant down payment. If you have the upper hand as a responsible borrower, you can ask for better interest rates or even a reduction of fees. Being a part of your current financial institution may entitle you to better rates.
Once you find terms you’re happy with, request a written rate lock as a legally binding agreement that includes the time period of the loan and the agreed-upon rate. You’ll want to know in advance if the lender charges an additional fee for rate locks so you’re prepared to factor that into your overall forecasted costs.
Picking The Best Rate/Promotions On Certain Loan Products
As a borrower, you can do your own research online to see what rates each lender offers, what type of products they provide and how these products compare to those found elsewhere. Do keep in mind that interest rates can fluctuate often and promotions can come and go frequently, so make sure your compatibles are current and accurate.
The process of applying for a loan will involve a LOT of paperwork and gathering of information so it’s important that you choose a lender who will make that process run smoother and who you get along well with. Someone reliable that is happy to answer all your questions can go a long way toward making the process smoother.
Choosing An Online Lender
If you’re not dead set on a face-to-face relationship, choosing an online lender could save you money. These lenders typically have a lot less overhead and as a result, can offer customers lower rates and fees. Keep in mind that if you tend to do better having a lender that walks you through every step of the process and can sit down with you to go over concerns/questions, an online lender may not be for you.
Choosing A Bank Or Credit Union
Shopping around for the best rates is always recommended. Depending on the type of mortgage you’re looking for (fixed/variable, amortization period etc.), your rate will vary regardless of whether you opt to go with a bank, credit union or mortgage broker. If you’re looking for another option for the best rates, consider approaching your current financial institution (bank or credit union) where you conduct your personal banking as sometimes special rates or promotions are reserved for clients when it comes to loan products.
Leveraging Provincial Programs
There are plenty of programs available in different provinces that can help get you access to better terms or rates as a home buyer. In Ontario, options like The First-Time Home Buyer Incentive can give you a leg up in the market by providing financial assistance. Be sure to research available options in your province/area so you can take advantage of any programs that may be well suited to your personal situation.
Tend to the factors within your control (like your credit score) and put in the time to research all your options in advance to ensure you get access to the best possible mortgage rates on the market. Don’t be afraid to negotiate and ask the tough questions and remember that you have the power to choose your lender and the terms that suit you best.